Thursday November 30, 2023

An urgent need to reform

September 26, 2023

LAHORE: Pakistan has a per capita income of $1,300 where 40 percent of its population is living below the poverty line. It must be considered a low-income or poor country as a significant portion of its population is experiencing economic hardship.

Global institutions might bracket us among middle income countries, but the fact that 40 percent of the population lives below the poverty line reveals the level of inequality in the society, absence of access to basic services, health and education.

The World Bank has rightly said that Pakistan’s economic model has failed. Our rulers must realise that nations in the current global scenario fail when the economic model they pursue is not sustainable.

Tobias Haque, the World Bank’s lead country economist for Pakistan has said that Pakistan’s economic model is no longer reducing poverty, and the living standards have fallen behind peer countries. In fact, instead of reducing poverty it is forcing more families into poverty.

According to the World Bank, poverty in Pakistan shot up to 39.4 percent by the end of June 2023 as 12.5 million more people went below poverty line amid poor economic conditions. Now 95 million people in Pakistan are living below the poverty line.

The remedy suggested by the World Bank is to immediately increase the tax to GDP ratio by 5 percent and cut expenditure by 2.7 percent of the GDP.

This is a tall order and requires strong political will. If we increase our tax to GDP ratio by 5 percent it would mean adding $16.5 billion (Pakistan’s GDP 330 billion) to our revenues. This translates into Rs4,260 billion additional revenues after converting dollars at Rs280.

The 2.7 percent cut in expenditure of the GDP will translate into $6.1 billion, which is equivalent to Rs1,736 billion. The most difficult part would be the cut in expenditure that can only come after reducing perks and privileges of the elite to realistic levels.

It is a do or die situation for Pakistan. If corrective measures are not taken immediately, a higher percentage of the population would go below the poverty line.

The question is; where to generate additional revenues. Would it be possible to generate this additional amount from existing taxpayers, or the government has to muster the courage to transparently bring tax evading sectors into the tax net.

The two sectors identified by the World Bank that evade taxation are real estate and agriculture. Ironically these two sectors are fully registered as they are transferred, held or purchased through court registries. But somehow no criteria has been fixed to tax them according to their capacity.

Then there are traders that account for 16 percent of GDP and pay nominal tax. Successive governments in the last 30 years have been trying in vain to bring these and many other sectors under the tax net. What could the present government do to reverse this aversion to documentation?

Ailments in the economy pointed out by the World Bank are well known to the economic planners and ruling elite. It seems that Pakistan’s low human development, unsustainable fiscal situation, over-regulated private sector, agriculture and energy sectors suit the vested interests who benefit from these weaknesses.

If Pakistan has to move forward these should be the priority areas for reforms for any government that takes charge of the country’s affairs. This in fact should be Pakistan’s moment for significant policy shift.